Chapter 8: Property, Plant & Equipment

Question 1

What is capital expenditure?

Answer 1

expenditure which results in the acquisition of non-current assets

Question 2

What is revenue expenditure?

Answer 2

expenditure incurred for the purpose of trade or to maintain non-current assets

Question 3

How is capital expenditure accounted for? (2)

Answer 3

1. not charged as an expense in the SOPL although a depreciation charge is made over time as an expense in the SOPL.
2. on non-current assets results in the appearance of non-current asset in the SOFP

Question 4

When is revenue expenditure incurred? (2)

Answer 4

1. for the purpose of the trade of the business. includes expenditure classified as selling and distribution expenses, admin expenses & finance charges.
2. to maintain the existing earning capacity of non-current assets

Question 5

A business purchases a building for $30 000. It then adds an extension to the building at a cost of
$10 000. The purchase of these are funded by a loan from the bank. The building needs to have a few
broken windows mended, its floors polished and some missing roof tiles replaced. These cleaning and
maintenance jobs cost $900.

What is counted as capital expenditure? revenue expenditure?

Answer 5

In this example, the original purchase ($30 000) and the cost of the extension ($10 000) are capital
expenditures, because they are incurred to acquire and then improve property, plant and equipment
which is a non-current asset. The other costs of $900 are revenue expenditure because these merely
maintain the building and thus the ‘earning capacity’ of the building.

Question 6

What is capital income?

Answer 6

the proceeds from the sale of non-trading assets. i.e. non-current assets like property.

Question 7

Give an example of capital income?

Answer 7

the profit from the sale of equipment that the business no longer needs.

Question 8

What is Revenue income? (3)

Answer 8

1. sale of trading assets such as goods
2. the provision of services
3. interest & dividends received from investments held by the business.

Question 9

What are capital transactions?

Answer 9

transactions relating to an increase or decrease in capital. they add or subtract from the cash assets of a business but are not reported through the P&L

Question 10

What does revenue expenditure result from?

Answer 10

the purchases of good and services to either 1. use in the accounting period and be a cost etc. or b. to result in a current asset as they have not been consumed yet i.e. goods still in storage.

Question 11

What does capital expenditure result in?(+3)

Answer 11

purchase or improvement of non-current assets.

1. provide benefits in more than one accounting period.
2. not acquired with the intent of resale
3. are gradually depreciated over time

Question 12

Capital or revenue:

a. The purchase of a property (e.g. an office building).
b. The annual depreciation of such a property.

Answer 12

a. Capital expenditure.

b. Depreciation of property, plant and equipment is revenue expenditure.

Question 13

Capital or revenue:

c. Solicitors’ fees in connection with the purchase of such a property.
d. The costs of adding extra storage to a computer used by the business.

Answer 13

c. The legal fees associated with the purchase of a property may be added to the purchase price
and classified as capital expenditure. The cost of the property in the statement of financial
position of the business will then include the legal fees.
d. Capital expenditure (enhancing an existing non-current asset).

Question 14

Capital or revenue:

e. Computer repairs and maintenance costs.
f. Profit on the sale of an office building.

Answer 14

e. Revenue expenditure.

f. Capital income (net of the costs of sale).

Question 15

Capital or revenue:

g. Revenue from sales by credit card.
h. The cost of new plant.

Answer 15

g. Revenue income.

h. Capital expenditure.

Question 16

Capital or revenue:
i. Customs duty charged on the plant when imported into the country.
j. The ‘carriage’ costs of transporting the new plant from the supplier’s factory to the premises of the
business purchasing the plant.

Answer 16

i. If customs duties are borne by the purchaser of the non-current asset, they are added to the
cost of the machinery and classified as capital expenditure.
j. Similarly, if carriage costs are paid for by the purchaser of the non-current asset, they are
included in the cost of the non-current asset and classified as capital expenditure.

Question 17

Capital or revenue:

k. The cost of installing the new plant in the premises of the business.
l. The wages of the machine operators.

Answer 17

k. Installation costs of a non-current asset are also added to the non-current asset’s cost and
classified as capital expenditure.
l. Revenue expenditure.

Question 18

What are the two ways a business can use and get rid of property, plant & equipment?

Answer 18

1. use the asset until it is completely worn out, useless & worthless
2. sell the asset at the end of its useful life, as second-hand item or scrap

Question 19

Define depreciation

Answer 19

systematic allocation of the depreciable amount of an asset over its useful life

Question 20

Define property, plant & equipment. (2)

Answer 20

1. items that are held for use in the production or supply of goods and services, for rental to others, or for admin purposes.
2. are expected to be used during more than one accounting period.

Question 21

Define useful life (2)

Answer 21

1. the period over which an asset is expected to be available for use by an entity.
2. the number of production or similar units expected to be obtained from the asset by an entity.

Question 22

Define the depreciable amount

Answer 22

the cost of an asset, or other amount substituted for cost less residual value.

Question 23

What factors should be considered when estimating the useful life of a property, plant, and equipment? (3)

Answer 23

1. expected physical wear and tear
2. obsolescence
3. legal or other limits on the use of the asset

Question 24

What is ‘residual’ value?

Answer 24

the value of an asset after depreciation

Question 25

What are the two common misconceptions around depreciation/

Answer 25

1. that charging depreciation is to reflect the fall in the value of an asset over its life.
2. that depreciation is provided os that an asset can be replaced at the end of its useful life.

Question 26

What are the two things that need to be accounted for when a non-current asset is depreciated?

Answer 26

1. the charge for depreciation is a cost or expense of the accounting periods in the SOPL
2. The value of the asset in the SOFP must be reduced by the amount of depreciation charged. the value of asset = carrying value (cost less depreciation) also known as the carrying amount.

Question 27

What is the straight-line method of calculating/applying depreciation?

Answer 27

the total depreciable amount is charged in equal instalments to each accounting period for the expected useful life of the asset.(cost-residual value/time = depreciation amount)

Question 28

When is the straight line method of depreciation used?

Answer 28

when it is reasonable to assume that the business enjoys equal benefits from the use of the asset in every period throughout its life.

Question 29

What happens if an asset is purchased part of the way through a year and the straight line method of depreciation is applied?

Answer 29

calculate the part year amount of depreciation for that period by calculating it annually and then taking the fraction of it.

Question 30

What is the diminishing value method of depreciation?

Answer 30

calculates the annual depreciation charge as a fixed percentage of the carrying value of an asset. also called the reducing balance method.

Question 31

What is a thing to note when using the diminishing value method to calculate depreciation?

Answer 31

the annual charge of depreciation is higher in the earlier life of the asset

Question 32

When might the diminishing value be used?

Answer 32

when it is considered fair to allocate a greater proportion of the total depreciable amount to the earlier years and a lower proportion to the later years, This assumes that the benefits obtained from the asset decline over time. i.e. machinery that is less productive as it gets older

Question 33

When deciding which depreciation method to apply what is the most important thing to consider?

Answer 33

doesn’t matter so much which one you use as long as you use it consistently.

Question 34

Who decides what the sensible life of an asset it/

Answer 34

the business. this should also be kept consistent from year to year.

Question 35

Can a business depreciate assets in different ways?

Answer 35

same asset, different ways = no

different assets, different ways = yes

Question 36

What is the purpose of providing for depreciation?

Answer 36

To recognize the cost of an asset, writing it off gradually assures that when you sell it and get less back you have already allowed for that price difference. more accurate reflection of the items worth.

Question 37

In which case would the depreciation method applied to an asset change?

Answer 37

Preferably never but if there are changes to the expected pattern of use of the asset and therefore the economic benefit of the asset the method should be changed.

Question 38

When you change the method of depreciation of an asset on what value is this applied and which years does it effect?

Answer 38

applied to the carrying value so that only current and future years are affected.

Question 39

What things does the depreciation charge on non-current asset depend on? (3)

Answer 39

1. cost/value of asset
2. estimated residual value
3. estimated useful life

Question 40

What formula is used to adjust depreciation?

Answer 40

new depreciation = (CV - residual value)/revised useful life

Question 41

Define accumulated depreciation

Answer 41

the amount set aside as a charge for the wearing out of property plant and equipment.

Question 42

What are the two basic aspects of accumulated depreciation to remember?

Answer 42

1. depreciation is charged every year in the SOPL

2. total accumulated depreciation builds up until the asset is depreciated fully.

Question 43

Where is depreciation applied when an asset is revalued?

Answer 43

to the revalued amount

Question 44

Why is a revaluation not included in the SOPL?

Answer 44

the gain in value is not realised ie. the asset is estimated to be more but it hasn’t been sold. it may end up not being sold for that much. the gain only appears in the SOPL when the profit is realised. till then it stays int he ‘revaluation reserve’ as capital.

Question 45

What is ‘profit on disposal of non-current assets’ or ‘loss on disposal’?

Answer 45

the profit or loss of non-current assets being disposed of. as they are capital items its counted as a capital gain or capital loss. reported as expenses or income.

Question 46

How is the profit or loss of disposing of an asset calculated?

Answer 46

difference between carrying value at the time of sale and net sale price (price - costs of making the sale)